Obama Targets a 'Grand Bargain' to Fix Budget Mess

Odd as it sounds amid a wheezing economy, mounting bankruptcies and rising unemployment, President-elect Barack Obama and his aides realize they'll actually be dealing with the easy part of their economic challenge when he takes office next week. After all, getting Congress to agree to spend billions of dollars and cut billions more in taxes to stimulate the economy right now is, politically speaking, relatively easy.

The harder part will be trying to follow that up by creating what is coming to be known in Obama circles as a Grand Bargain: getting everyone to agree to clean up the nation's budget mess in a really big way, one that doesn't just fix the problems being created now, but also addresses the frightening long-term problems America was going to face anyway to pay for Social Security and Medicare in coming decades.

For this Grand Bargain to work, all sides would agree to sacrifice some part of their agenda. The price they would agree to pay would be unhappiness -- temporary, perhaps, but real -- among their constituents and favorite special interests. Their reward would be a cure for problems everybody knows they'd have to deal with a few years down the road.

In other words, the Obama view is that the country has reached a momentous point in its economic history, like it or not. Why not try to see whether the nation can turn pain into an opportunity to make an equally momentous change in the way it conducts its affairs?

This is why the opening of the Obama era next week will be a time of both great peril and great opportunity. The risk of further economic meltdown and government overreach are both very real. But times of great problems also can be times of great clarity, when all see and agree that big problems simply can't be avoided.

President George W. Bush, by comparison, could never get Congress or the nation to buy into his call to reform Social Security, noble though the effort might have been. To be blunt, the problem just didn't seem all that pressing to enough people. Life was good; the problem could be pushed into a corner.

These times are different. The test of Mr. Obama's presidential leadership is whether he can convince his own party, the Republican opposition and the public that pain also represents an opportunity to do more than muddle through.

Things won't start out quite so grandly next week, of course. Mr. Obama will start by trying to build a three-legged stool to stabilize the economy here and now.

The first leg of the stool is to be an economic-stimulus package in the range of $800 billion. The second leg is to be the second, $350 billion half of the financial-markets rescue package Congress approved last year, used to both stabilize the wobbly banking system and head off a new wave of home foreclosures that could arise as more people lose jobs. (The Senate just last night voted to let that money flow to Mr. Obama's administration.)

The third leg -- largely underappreciated for now, but a high priority for the new president -- is a legislative package to overhaul regulation of the financial markets. The Obama team considers that step crucial to maintain political support for the other parts of the rescue plan. It worries that without confidence that there is a new regulatory system to create greater transparency for investors, both Congress and the public will begin to feel that tax dollars are being thrown down the same black hole that swallowed the nation's 401(k)s.

When all that is done, the federal government's budget deficit will be an ugly sight to see, north of $1 trillion.

That will pose both a problem and an opportunity. If the deficit problem is that acute, the case for overhauling government to make it more efficient and less wasteful also is more pressing. That means there could, for example, be real support for changing the way the Pentagon handles acquisitions, finding government programs that can be eliminated and attacking congressional earmarks more seriously.

But those aren't the places where the big money is to be found to address the yawning deficit. The big money lies in the defense budget, in interest on the national debt and in entitlement programs, specifically Medicare and Social Security.

Even before the new deficit migraine arrived, simply keeping those programs afloat in their current form was going to create a giant headache anyway. The government traditionally uses about 18% of the gross domestic product to fund its programs. Even before the big bailout costs, the Office of Management and Budget had estimated that, in theory and without policy changes, that would rise to something like 40% by 2080; the deficit alone would consume 22% of GDP.

Here's where the Grand Bargain could come in. Like Humpty Dumpty, the budget is going to be broken anyway. In putting it back together, would retirees be willing to accept that idea of having more prosperous seniors pay a monthly premium to receive their Medicare health coverage? Would liberals accept cuts in their favorite social programs? Would conservatives accept the idea of a carbon tax, to both raise big money for entitlements and prod the nation to move more quickly away from fossil fuels?

Those would be the big trade-offs. Washington may shy away from them once again. But the Obama era of big problems at least creates the opening for that kind of big debate.

While most Medicare recipients don't pay premiums for basic hospitalization coverage, they do pay premiums for programs covering physician services and prescription drugs. This column didn't make clear that recipients already pay some premiums.

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